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Samsung permanently halts production of its Galaxy Note 7; $18 billion wiped off shares

Samsung has permanently ended production and sales of its Galaxy Note 7 smartphones after reports the device was catching fire, the company said on Tuesday, ending one of the most humiliating episodes in the electronic giant's history.

"For the benefit of consumers' safety, we have stopped sales and exchanges of the Galaxy Note 7 and have consequently decided to stop production," Samsung said in a statement.

Shares of the South Korean firm closed over 8 percent lower on Tuesday after the company asked its global partners to stop sales and exchanges of its exploding Galaxy Note 7. Samsung announced the shuttering of Note 7 productions after the close in South Korea.

The company's shares closed at 1,545,000 won with around $18 billion being wiped off the value of the company, according to Thomson Reuters data.

Samsung said on Tuesday that it was asking all carrier and retail partners around the world to stop sales and exchanges of the Note 7 while it investigates the handset's battery problems. The firm is in the middle of a global recall in which it is replacing Note 7 handsets with new ones. But there have been reports of a handful of the replacement smartphones also catching fire, with one incident taking place on a Southwest Airlines plane.

South Korean newspaper Hankyoreh followed up with a report suggesting that Samsung is moving towards a permanent halt.

"It won't be easy to resume production and sales of Note 7 even if the US Consumer Product Safety Commission announces that it was not a faulty product that caused the ignition," Hankyoreh said quoting a source at Samsung.

In response to the article, Samsung told CNBC it would "have more specific action plans after talks with carriers and government bodies in each country".


$9.5 billion lost opportunity

Before the recall happened, analysts were expecting Note 7 shipments to total between 15 million and 19 million over the third and fourth quarter of 2016 and the first quarter of 2017. And the lost opportunity could total around 10.7 trillion won ($9.5 billion), based on 16 million units in foregone Note 7 shipments, according to Nomura.

"We think the Galaxy Note 7 incident may hurt demand for Samsung Electronics' other smartphone models as well," Nomura said in a note on Tuesday.

The broker said Samsung's fourth-quarter operating profit outlook could be lowered by 85 percent from its current forecast to 500 billion won. The outlook for profit in Samsung's mobile division for 2017 could fall 22 percent from current expectations.


Apple shares rally

Samsung's loss could be Apple's gain, according to analysts. Shares in the U.S. technology titan closed 1.74 percent higher on Monday on the hopes that Samsung customers might defect.

"Most of them will go to Apple. Those are premium customers who prefer a premium brand," Neil Shah, research director of devices and ecosystems at Counterpoint Research, told CNBC by phone, adding that Samsung shipments are likely to fall for 2017.


A Samsung Galaxy Note 7 lays on a counter in plastic bags after it was returned to a Best Buy on September 15, 2016 in Orem, Utah.
George Frey | Getty Images
A Samsung Galaxy Note 7 lays on a counter in plastic bags after it was returned to a Best Buy on September 15, 2016 in Orem, Utah.

And the recall saga could also weigh on Samsung's broader portfolio of devices, which includes its flagship Galaxy S7 and S7 Edge. Analysts said that the loss of reputation with this could impact the upcoming flagship Galaxy S8 which is set to be released in the first quarter of 2017.

"How will the loss of brand value/image/loyalty impact future sales of Samsung smartphones in general – and more importantly, the upcoming Galaxy S8 in March 2017– the true flagship product. It is easy to overlook the first recall, but much more difficult to overlook the second," Credit Suisse said in a note on Tuesday.


Not all doom and gloom

Nomura has maintained its buy rating on Samsung, suggesting that the negative impact from the Note 7 debacle will be more than offset by strong performances in the semiconductor and display divisions of the company. Both have been strong performers for Samsung.

The broker said that even if the mobile operating profit does fall by 85 percent in the fourth quarter of 2016 and 22 percent for the full-year in 2017 – what it calls the worst-case scenario – Samsung's overall 2017 operating profit will likely grow 30 percent year-on-year to 37.6 trillion Korean won, surpassing 2013's all-time high of 36.8 trillion Korean won.

Correction: Analysts were expecting Note 7 shipments to total between 15 million and 19 million over the third and fourth quarter of 2016 and the first quarter of 2017, not the first quarter of 2016 as previously stated.